Health Coverage Tax Credit Authorized by the Trade Act

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The Trade Act of 2002 (P.L. 107-210) authorized a federal income tax credit of 65% of what eligible taxpayers pay for qualified health insurance for themselves and their family members. The credit is refundable, so taxpayers may claim the full credit even if they have little or no federal income tax liability. The credit can also be advanced, so taxpayers need not wait until they file their tax returns in order to benefit from it. The credit is called the health coverage tax credit (HCTC) by the Internal Revenue Service, the principal federal oversight agency, though other names are used as well.

Eligibility for the HCTC is limited to three groups of taxpayers. The first two consist of individuals who are eligible for Trade Adjustment Assistance allowances because they have lost manufacturing jobs due to increased foreign imports or shifts in production outside the United States. The third consists of individuals whose defined benefit pension plans were taken over by the Pension Benefit Guaranty Corporation due to financial difficulties. Eligible individuals cannot be enrolled in certain other health insurance (e.g., Medicaid) or entitled to certain other coverage (e.g., Medicare Part A).

The HCTC can be claimed only for 10 types of insurance coverage specified in the statute, seven of which require state action to become effective. As of November, 2004, 39 states and the District of Columbia made at least one of these seven forms of coverage available; in the remaining 11 states, only the three automatically qualified forms not requiring state action were available, though not to all who were eligible for the credit.

The HCTC is of interest to policy makers searching for ways to help people acquire and maintain health insurance coverage. Debates both before and after its enactment reflect a larger controversy over the use of tax incentives in financing healthcare, in contrast to expanding public programs such as Medicare and Medicaid.

The HCTC is not widely used. As of November 2004, 13,369 of the estimated 223,307 taxpayers who were potentially eligible for the credit were receiving advance payments, or about 6%. Others might be claiming the credit without an advance payment, but their number is not likely to be large. Reasons why eligible people do not use the credit include difficulties finding qualified insurance and difficulties paying the part of the premium not covered by the credit (the remaining 35%).

A number of bills were introduced in the 108th Congress to expand eligibility for the HCTC and exempt state qualified plans from its consumer protection provisions. As these measures were not enacted, they might be reintroduced in the 109th Congress. There may also be proposals for expanded tax credits that are generally available to lower and modest income families. This report will be updated as legislative activity occurs and more information about the credit and insurance options becomes available.